Fiscal Cliff: Will the 2% Social Security payroll tax cut expire?

(MoneyWatch) -- Americans could see smaller paychecks next year amid
signs that President Barack Obama and Republican leaders negotiating a
deal on the so-called "fiscal cliff" may not extend a payroll tax break
scheduled to expire at year's end.

CBS News Chief White House Correspondent Major Garrett reports that Mr.
Obama did not ask for an extension of the temporary 2 percent payroll
tax cut in his counter-offer Monday night to a fiscal proposal put forward by Rep. John Boehner, R-Ohio.

With talks still fluid, a rise in the taxes that fund Social Security
is not a done a deal. But the White House's choice not to raise the
issue yesterday suggests it may be sacrificed as part of broader
compromise with Republicans over proposed tax hikes on wealthy
Americans. Many experts had expected the sides to allow the payroll cut
to expire as planned.

Following the November presidential
election, House Speaker John Boehner staked out the Republican position
on a tax increase, saying that "With this vote, the American people have
also made clear that there is no mandate for raising tax rates." Yet
five weeks later the Ohio Republican reversed course and said he is open
to raising taxes on high income-earners, but only for those with
earning more than $1 million a year.

Mr. Obama countered
with an offer to raise his tax rate income threshold to $400,000 a
year, from $250,000, narrowing the differences between the two sides.

Payroll taxes are used to fund Social Security, with businesses and
employees each contributing a portion of worker's annual compensation
(up to $110,100 as of 2012). For the past two tax years, employee
contributions for the government retirement program was 4.2 percent,
compared with the normal 6.2 percent rate. That resulted in lower taxes
for 160 million Americans, providing a tax cut of roughly $960 for a
typical worker making $50,000 a year and more than $1,900 for anyone
with annual income of $100,000.

The intent of the payroll tax
holiday was to stimulate consumer spending. A 2011 report by Moody's
Analytics estimated that every $1 decrease in revenue from reducing the
payroll tax for workers expands the economy by $1.27. Reducing payroll
taxes is also acknowledged by many economists as a more effective way of
boosting growth than most other fiscal measures, including offering
housing tax credits, an employer-side payroll tax cut, and even an
across-the-board tax cut, according to the research firm.

As a result, expiration of the payroll tax cut could have major ramifications for the economy. JPMorgan estimates
that the payroll tax hike "will reduce U.S. disposable income by $125
billion," which would be a drag on consumer spending and could reduce
GDP growth by over half of a percent next year.